Interest Only Loan

With an interest-only loan, you only pay interest on the amount you have borrowed for an agreed period (usually up to 5 years).

At the end of this time, the loan usually reverts to a principal and interest loan and you start repaying the principal as well as the interest.

While investors usually prefer this type of loan because it decreases their monthly mortgage payments thereby increasing their cash flow, most home loans are principal and interest loans, which means that your regular payments will reduce the principal (amount borrowed) as well as paying off the interest.

Some investors make extra payments into an offset account to reduce the amount of interest they pay on their loan.

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

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